Hedge funds have poured into the biggest tech names alongside top consumer discretionary picks as their bullish bets soared to post-crisis highs during the first quarter, according to research from Goldman Sachs released Friday.
The so-called FAANG set of stocks – comprising Facebook, Amazon, Apple, Netflix and (Google-parent) Alphabet – were included in the voracious buying undertaken during the quarter which saw both gross and net exposure leap to post-crisis highs of 230 percent and 73 percent respectively.
Gross exposure adds together a fund's long and short positions to measure the absolute amount of exposure a fund has while net exposure subtracts the amount of short exposures from long exposures to get a general sense of how bullish investors are about the market's upside potential.
Short interest – whereby investors place bets on stocks falling – is now lurking around a five-year low, according to the research. This as the S&P 500 has continued to post record highs this calendar year.
The ramp-up in long bets made by hedge funds took off in the second half of 2016, say the research's authors and stepped-up further following President Trump's election victory amid hopes that he would deliver infrastructure spending, tax reforms, deregulation and a rethought approach to healthcare – all measures which were expected to benefit companies' bottom lines.
The hedge funds' buying behavior suggests they are not overly concerned about chasing a trend that has already been on a tear, given that both tech and consumer discretionary are the best performing sectors so far in 2017.
The concentration of investments reported by Goldman Sachs was also notable, with the typical hedge fund said to currently hold two-thirds of its long equity positions its ten top stock picks. While slightly lower than last quarter, this figure still hovers around historic highs and suggests bullish sentiment is increasingly restricted to focus on particular names and sectors.
By way of comparison, the typical large-cap mutual fund holds around a third of its long positions in its top ten stocks while the figure drops to around a fifth for both small-cap funds and the S&P 500 index itself.
Falling out of favor with hedge funds during the first quarter were financials and health care stocks. Financials' performance has been closely tied to the highs and lows of the Trump presidency after enjoying a strong boost upon his election while healthcare stocks continue to fluctuate subject to the endless back-and-forth on Capitol Hill regarding sector reform.